Question 1: What are some of the alternative sources from which

companies can raise equity capital?

Private companies can raise capital from:
(i) Angel investors
(ii) Venture capitalist
(iii) Institutional investors or corporate investors
Question 2: What are the advantages and disadvantages to a private
company of raising money from a corporate investor?
Advantages: Large corporate partner may provide benefits such as capital,
expertise, or access to distribution channels. The partner may become an important
customer or supplier for the start-up firm, and the willingness of an established
company to invest may be an important endorsement of the new company.
Disadvantages: Not all corporate investments are successful. The corporate
partner may gain access to proprietary technology or eventually even become a
competitor. Once a young firm has aligned itself with a corporate partner, the
competitors of this partner may be unwilling to do business with the start up.
Question 3: What are the main advantages and disadvantages of going
public?
Advantages: Liquidity and access to capital
Disadvantages: Once a company becomes a public company, it must satisfy all of
the requirements of being a public company such as Securities and Exchange
Commission (SEC) filings and listing requirements of the securities exchange.
Question 4: What items in a business plan does a venture capitalist look
for in deciding whether to provide initial financing?
(i) Description of the business and industry trends
(ii) Vision and key strategies for the business
(iii) Principal products or services and any innovative features or patents
(iv) The management team and their experience
(v) Market analysis and sales forecast
(vi) How the products will be marketed and sold
(vii) Production costs such as material and labour
(viii) Facilities needed and estimated costs
(ix) Capital required and the use of the proceeds
(x) Detailed budget with six years of projected financial statements
Question 5: Explain why a company may choose to keep it private?
By remaining private, a company effectively avoids being subjected to SEC
regulations. Many of the large private companies are family owned with a long
history and prefer not to be subjected to public scrutiny. In addition, the
management of the company is not pressured by Wall Street to report short-term
earnings but can concentrate their efforts on long-term growth and strategy
realization.
Question 6: Who are venture capitalist and what do they do?
Venture capitalist are individuals or groups of people that help new businesses to
get started and provide much of their early financing. They pool money from various
sources such as wealthy individuals, insurance companies, pension funds or large
corporations and invest in start-up ventures. The primary types of businesses
seeking the services of venture capitalists are high-tech firms.
***Question 7: How do venture capitalist reduce the risk of their
investment?
(i) Stage funding: gives investors a chance to periodically reassess the project, the
management team and the firms financial performance and make necessary
corrections throughout the duration of the project.
(ii) Personal investment by the entrepreneurs: requiring the entrepreneurs to make
substantial personal investment in the business to make sure they are highly
motivated to succeed.
***Question 8: What are some of the reason debt financing is cheaper than
equity financing?
Taxes make the situation better if you had debt, since interest expense is deducted
from earnings before income taxes are levied, thus acting as a tax shield.
Issuing and transaction costs associated with raising and servicing debt are
generally less than for ordinary shares
Lenders require lower rate of return than ordinary shareholders. Debt financial
securities present a lower risk than shares for finance providers because they have
prior claims an annual income and liquidation. In addition, securities is often
provided and covenants are imposed.
Stock valuation
1. What can you conclude about the relationship between the required return and
stock price?
As the required return increases, the stock price decreases. This is the function of
the time value of money. A higher discount rate decreases the present value of cash
flows. It is also important to note that relatively small changes in required return has
dramatic impact on the stock price.
Bond valuation
2. All else the same, the longer the maturity of a bond, the greater its price
sensitivity to changes in interest rates.
3. All else the same, the longer the coupon rate of the bond, the greater is its price
sensitivity to changes in interest rates.
4. Bond price vs Bond yield
(a) What is the relationship between the price of a bond and its YTM?
The bond price is the present value of cash flows from a bond. The YTM is the
interest rate used in valuing the cash flows from a bond.
(b) Explain why some bonds sell at a premium over par value while other bonds sell
at a discount. What do you know about the relationship between the coupon rate
and the YTM for premium bond? What about discount bonds? For bonds selling at
par value?
If the coupon rate is higher than the required return on the bond, the bond will sell
at a premium since it provides periodic income in the form of coupon payments in
excess of that required by investors on similar bonds. If the coupon rate is lower
than the required return on the bond, the bond will sell at a discount since it
provides insufficient coupon payments compared to that required by investors on
similar bonds. For premium bonds, the coupon rate exceeds the YTM; for discount
bonds, the YTM exceeds the coupon rate; for bonds selling at par, the YTM equals to
the coupon rate.
 What is the relationship between the current yield and YTM for premium bonds?
For discount bonds? For bonds selling at par value?
Current yield is defined as the annual coupon payment divided by the current bond
price. For premium bonds, the current yield exceeds the YTM; for discount bonds,
the current yield is less than the YTM; for bonds selling at par value, the current
yield equals to the YTM. In all cases, the current yield plus the expected one-period
capital gains yield of the bond must equal to the required return.
5. Components of bond return
Explain the interrelationship among the various types of bond yields.
All else held constant, premium bond pays high current income while having price
depreciation as maturity nears; discount bond does not pay high current income but
have price appreciation as maturity nears. For either bond, the total returns is still
9% (YTM), but the return is distributed differently between current income and
capital gains.
Liquidity
(i) Current ratio
Sunset Boards has a current ratio of 1.55 which is 0.35 more than the industrys
average. This means that Sunset Boards has 35% more current assets to meet
current liabilities than the industrys average. This represents an improvement in
liquidity as the business will be able to easily meet its short term obligations in the
future.
If current ratio is increasing overtime, this could indicate that the business is tying
up an increasing proportion of its resources in inventory, receivables and cash and
cash equivalents instead of the resources being invested in non-current assets that
could earn profits.
Activity
(i) Days in sales in inventory/Inventory turnover
Sunset Boards has higher days in sales in inventory than the industry average by 10
days. This means that goods are being kept for a longer period of time before being
sold. This also means that inventory has not been properly managed or that there is
theft or wastage of inventory.
(ii) Days in sales in receivables/receivables turnover
Sunset Boards has lower days in sales in receivables than the industry average by 2
days. This means that Sunset Boards is taking a longer time than the industry
average to collect debts from credit customers. This also means that there may be
debts which may prove to be bad.
Debt
(i) Debt to equity ratio
Sunset Boards has a debt equity ratio of 1.11 which is 0.3 times lower than the
industrys average. This means that Sunset Boards has lesser financial leverage
than the industry average. This means the business will be able to meet long term
liabilities easier than the industry average.
Profitability
(i) Gross profit margin
Sunset Boards has a higher profit margin than the industry average by 24%. This
means that Sunset Boards earn an additional $0.24 for every $1 of sales. This could
mean that Sunset Boards purchased their goods at a lower price, less wastage of
inventory or increased their selling price. Therefore, profitability has better than the
industry average.
(ii) Return on total assets
Sunset Boards has a lower return on total assets than the industry average by 2%.
This means there is less efficient use of assets. However, this fall in return on total
assets may be because of a revaluation of non-current assets or purchase of non-
current assets at the year end. Therefore, profitability is not affected.

(iii) Return on common equity

Sunset Boards has a lower return on common equity than the industry average by
11%. This means that the managers at Sunset Boards are not using capital at their
disposal efficiently. However, this fall in return on common equity may be a result of
a revaluation of non-current assets or a purchase of non-current assets at the year
end. Therefore, profitability is not affected.
Market value
Market-to-book value
Sunset Boards market-to-book value is lower than the industrys average by 0.336.
This means that Sunset Boards have not been successful in creating value for its
stockholders than the industry average. However, this could mean that the share is
undervalued.
Others

Trade payable days , business is paying credit suppliers faster. Should make use of
extra credit. But perhaps to obtain cash discounts.
Du Pont Identity
ROE=ROA x Equity multiplier
ROE=Profit margin x Total Asset Turnover x Equity Multiplier
It tells us that ROE is affected by operating efficiency, asset use efficiency and
financial leverage.